30 May 2019

China – India Silicon Road: The New Trade Route (Silk Route 2.0) Runs Through the Technology Sector

This article was written by Shantanu Surpure and Rocky Lee

China is India’s Largest Trading Partner

China and India have been trading goods for centuries including along the historical “Silk Route”. According to Government of India statistics, China - India bilateral trade reached an all time high in 2018 to reach US$85 billion. The two countries have set a target of US$100 billion in bilateral trade.

China is India’s largest trading partner with the balance of trade in favor of China. India trades more with China than it does with the US and the UAE (the next two largest trading partners).

Recent geopolitical events have led to China seeking to expand its trade relations with India. China - India trade has traditionally been in the pharmaceuticals, minerals, textiles, chemicals and electronics sectors.

China– India Trade is Growing Rapidly and the Technology Sector is Leading the Growth

However, the technology sector is now leading the growth in China-India trade.

Chinese technology companies and venture capital funds invested US$5 billion in the Indian technology ecosystem in 2018 including in start up technology companies[1] , surpassing investment from the US and Japan.

Chinese strategic investors have made investments in sectors such as consumer, mobile, social media, health care and fintech.

Leading Chinese technology venture capital funds have been actively scouting the Indian market for investments[2].

Chinese venture capital funds have begun speaking at technology conferences in India and increasing their visibility and profile.

Outside of Mainland China and venture capital, Hong Kong based private equity funds are also active investors in India and are opening offices in Mumbai[3] .

Key Differences between the Chinese and Indian Technology Sectors: a Chinese Walled Garden versus an Indian Modified Open Door

China and India have adopted different strategies for the growth of their respective technology sectors. China has adopted a “walled garden” policy whereby certain sectors are reserved for Chinese companies. The effect has been that leading US technology companies have generally had a limited presence in China. In addition, foreign investors in the Chinese technology sector have had to utilize complex variable interest entities (VIE) investment structures.

In contrast, India has utilized a modified open door policy where US companies have had a deep presence in the Indian technology sector, initially using India as an outsourcing center for technology development but later capitalizing on the growth of the Indian market itself. Only a few sectors such as retail and recently, e-commerce in retail, have required foreign investor approvals and/or complex structuring.

Can India Replicate the China Growth Story in the Technology Sector?

A common investor thesis is that India is 10-20 years behind China but that India will grow rapidly. India will be the world’s fastest growing economy for the rest of this decade and will be the world’s fourth largest economy in the 2020s, behind only the US, China and Japan [4].

Having seen China grow quickly in the last twenty years, Chinese investors want to be a part of the India growth story including in the technology sector. According to reports, India has reached an inflection point in technology adoption with social, mobile, cloud and analytics driving digital disruption in the country [5]. India will have 627 million internet users by 2019 with 97% of internet users accessing the internet via a mobile phone[6].

India currently has 20 technology “unicorns” (ie, technology companies valued at over USS$1 billion), compared to 127 in China and 77 in the US [7]. India has the potential to grow 100 unicorns or more over the next five years.

With such potential for growth, Chinese investors want to be active participants in the Indian technology ecosystem.

[1]Business Line, “Chinese Investments in Indian Start Ups”, March 22, 2019 https://www.thehindubusinessline.com/companies/chinese-investments-in-indian-start-ups-cross-5-b-in-2018/article26612436.ece

[2]The Economic Times, “Chinese Venture Capital Funds Rushing to Buy Stakes”, June 12, 2018 https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/chinese-venture-capital-funds-rush-to-buy-stakes-in-indian-startups/articleshow/64550828.cms?from=mdr 

[3]Deal Street Asia, “PAG to Deploy More Capital in India”, April 2, 2019 https://www.dealstreetasia.com/stories/pag-india-128442

[4]Forbes, “India May Be the World’s Fasting Growing Economy”, January 10, 2018 https://www.forbes.com/sites/salvatorebabones/2018/01/10/india-may-be-the-worlds-fastest-growing-economy-but-regional-disparity-is-a-serious-challenge/#1ecf020c53ac   


[6] Economic Times, “Internet users in India to reach 627 million by 2019”, March 6, 2019 https://economictimes.indiatimes.com/tech/internet/internet-users-in-india-to-reach-627-million-in-2019-report/articleshow/68288868.cms?from=mdr


A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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